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Tuesday July 23, 2024

Washington News

Washington Hotline

IRS Publishes 2023 Tax Myths

As the April 18 tax deadline quickly approaches, the Internal Revenue Service (IRS) published a letter with the top tax myths. The IRS continues to process 2022 returns. It reports that 90% of income tax refunds have been processed within 21 days. On March 31, the IRS noted it had sent almost 63 million refunds with a value of more than $183 billion. The average refund for this year is currently $2,910.

Each filing season, the IRS receives many reports of tax myths. These tax myths are believed by many taxpayers which cause them to make errors or mistakes in filing. The IRS urges all taxpayers and tax professionals to understand these tax myths so that taxpayers avoid making tax errors.

1. Do Not Report Income — Some taxpayers believe they only need to report income if they receive an IRS Form 1099. The fact is that all income is taxable and must be reported, whether or not you receive an IRS Form 1099 or other tax reporting form. Income includes profits on goods sold online, investment income, income from part-time or seasonal work, self-employment income or income gained through a mobile app. Exceptions to taxable income include money received as a gift or for reimbursements.

2. Extension Excuse — Many taxpayers are unable to complete their tax return by the filing date and file for a six-month extension until October 16, 2023. While the taxpayer is permitted to extend the filing date, taxes are still due on April 18. Failure to pay the tax due could result in interest and penalties. Taxpayers in FEMA disaster areas may be subject to different filing dates. You may check Tax Relief in Disaster Situations on IRS.gov to see if you qualify for an extension to file and pay tax.

3. Speed Up Refund — Some taxpayers believe that a call or visit to the IRS in person will speed up their refund. This is not correct. The proper way to track your refund is to use the "Where's My Refund?" tool on IRS.gov or your IRS2Go mobile app.

4. "Where's My Refund?" Is Not Accurate — A taxpayer may find that the expected tax refund is different from what was projected or it takes longer. The "Where's My Refund?" tool is generally updated once per day. However, if a taxpayer has a Child Tax Credit, delinquent taxes or past due child support, there could be a difference in the refund amount. The IRS will mail a letter if there is an adjustment in the refund.

5. Secret Refund Deposit Date — Taxpayers may think that ordering a tax transcript is a secret way to find out their refund deposit date. However, tax transcripts are only available to help verify your income and tax filing status. Tax transcripts will not affect your refund deposit date.

6. Do Not Adjust Withholding — Many taxpayers believe that if they receive a refund this year, they will not need to adjust their tax withholding. However, there are multiple reasons why you may want to use the Tax Withholding Estimator tool on IRS.gov. If you have a job change, have a significant change income, become married or divorced, welcome a child or purchase a home, it may be helpful to you to adjust your withholding.

Conservation Easement Deed Safe Harbor Language

In Notice 2023-30; 2023-17 IRB 1, the IRS published safe harbor deed language for conservation easements. The new language covers provisions for judicial extinguishments and boundary line adjustments.

The SECURE 2.0 Act included a provision that required the IRS to publish safe harbor language for extinguishments and boundary line adjustments. The IRS was required to publish the adjustment clauses within 120 days of enactment. After the publishing date, taxpayers have 90 days until July 24, 2023 to record safe harbor deeds. The changes apply only to extinguishment and boundary line provisions within the deed.

The SECURE 2.0 Act included provisions designed to limit perceived abuse of the charitable deduction rules by syndicated conservation easement partnerships. Charitable deductions for most conservation easements created by partnerships are limited to two and one-half times the sum of each partner's relevant basis in the partnership. There are exceptions for a three-year holding period, partnerships created by members of a family and if the contribution is made to certified historic structures.

A qualified conservation easement is a restriction granted in perpetuity under Section 170(h)(2)(C). The easement must be qualified under state law. The deed must also include provisions for judicial extinguishments. Reg. 1.170A-14(g)(6)(i). If the conservation easement is a qualified perpetual interest but extinguished by judicial proceedings, the Donee organization must use the proceeds in a manner consistent with the designated conservation purpose. Reg. 1.170A-14(g)(6)(ii) notes that an extinguishment must assure the charitable organization that it will receive "a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as a whole at that time."

Section 3 of Notice 2023-30 describes the required process for filing an amended deed on or before July 24, 2023. The amendment must be treated as effective as of the date of the original deed and must include the required new language. The deed amendment process is not permitted for prior deeds that were part of a reportable transfer under Notice 2017-10, 2017-4 I.R.B. 544, were not treated as a qualified conservation contribution, are subject to a case that is currently in a Federal court or has been subject to a Sec. 6662 or Sec. 6663 penalty determined administratively by the IRS or in a final court proceeding.

The safe harbor extinguishment clause language includes the following:

"Pursuant to Notice 2023-30, Donor and Donee agree that, if a subsequent unexpected change in the conditions surrounding the property that is the subject of a donation of the perpetual conservation restriction renders impossible or impractical the continued use of the property for conservation purposes, the conservation purpose can nonetheless be treated as protected in perpetuity if (1) the restrictions are extinguished by judicial proceeding and (2) all of Donee's portion of the proceeds (as determined below) from a subsequent sale or exchange of the property are used by the Donee in a manner consistent with the conservation purposes of the original contribution.

Determination of Proceeds. Donor and Donee agree that the donation of the perpetual conservation restriction gives rise to a property right, immediately vested in Donee, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction, at the time of the gift, bears to the fair market value of the property as a whole at that time. The proportionate value of Donee's property rights remains constant such that if a subsequent sale, exchange, or involuntary conversion of the subject property occurs, Donee is entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction, unless state law provides that the donor is entitled to the full proceeds from the conversion without regard to the terms of the prior perpetual conservation restriction."

The safe harbor boundary line adjustment clause is:

"Pursuant to Notice 2023-30, Donor and Donee agree that boundary line adjustments to the real property subject to the restrictions may be made only pursuant to a judicial proceeding to resolve a bona fide dispute regarding a boundary line's location."

Editor's Note: This safe harbor language should clear up risks for many homeowners and landowners who have created conservation easement deeds. It is not designed to resolve the approximately 80 syndicated partnership cases currently in Tax Court or Federal District Court.

IRS Commissioner Werfel Faces Senate Finance Committee

On April 19, 2023, IRS Commissioner Daniel Werfel will testify before the Senate Finance Committee. His testimony will follow the release by the IRS of a strategic operating plan (SOP) for spending approximately $80 billion in supplemental funding over the next decade. The SOP explains IRS plans to centralize compliance efforts, improve taxpayer service and modernize technology.

A controversial aspect of the plan has been the decision to increase IRS employment by 86,000 employees. While some commentators have suggested that this could include 86,000 new enforcement agents, the IRS emphasizes that this is a comprehensive increase in staffing for many sections of the agency. The IRS expects to hire 1,500 new enforcement personnel in 2023 and 7,239 more enforcement personnel in 2024.

Another controversial issue has been the claim by Treasury Secretary Janet Yellen that increased audit rates will apply to individuals with incomes of higher than $400,000. Commissioner Werfel is bound to receive many questions about IRS plans to comply with this goal.

Senate Finance Committee Chair Ron Wyden (D-OR) has generally approved the goals stated in the IRS SOP. He indicates his top priority is to reduce the tax gap. He suggests the plan "shows a clear focus on the priorities" that members of the Senate Finance Committee have established.

The Government Accountability Office (GAO) is tasked with monitoring the operation of the new SOP. GAO Center for Taxpayer Rights Representative Jessica Lucas-Judy spoke at a web event on April 13. She indicated that the GAO would monitor IRS efforts to address "some of the priorities and challenges that we and others have identified in the past."

The $80 billion in new funding will be divided into four principal areas. There will be approximately $45 billion for enforcement, $25 billion for operations support, $4.8 billion for information technology (IT) systems and $3.2 billion for improved taxpayer service.

Comptroller General Gene L. Dodaro stated GAO is actively following the IRS efforts. He indicated that there are "32 audits ongoing or planned on IRA spending through 2025." According to Lucas-Judy, the GAO has pledged to continue to monitor "the extent to which the funds can be used or are being used to enhance the filing season and make the operations go more smoothly."

Editor's Note: This Senate Finance Committee hearing will be a lively debate on the future of the IRS. There will be an intense discussion on the tax gap, the need for IT upgrades and the methods for improving services for both taxpayers and professional advisors.

Applicable Federal Rate of 5.0% for April — Rev. Rul. 2023-6; 2023-14 IRB 1 (15 March 2023)

The IRS has announced the Applicable Federal Rate (AFR) for April of 2023. The AFR under Section 7520 for the month of April is 5.0%. The rates for March of 4.4% or February of 4.6% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.

Published April 14, 2023

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